A company-sponsored 401(k) tends to be the most popular retirement option for most working Americans. It makes sens why: it’s an easy, tax-favored way to save for the future. However, while these plans are easy to maintain, they can sometimes go awry if you’re not careful.
Below we’ve listed some of the biggest pitfalls that can ruin a good 401(k) savings plan and your retirement budget.
Investing Too Little
Your employer may match your contribution; however, just meeting the minimum investment requirement for a company match is not enough money to build a substantial retirement nest egg. Your retirement could last over 30 years. So, you want to ensure that you are investing more than the average employer contribution of 4.3%.
You should, ideally, be saving at least 10% of your income for your retirement. 10% may seem like a lot, but if you begin while young, it will yield you a substantial retirement fund. Older employees that didn’t start early to save, may need to invest more money into retirement. Bottom line? Make retirement saving a priority and you won’t be disappointed in your later years.
You can contribute up to $18,000 pre-tax dollars to your 401(k) plan this year alone. If you are over the age of 50, you may be eligible to contribute an extra $6,000 as a “catch up” contribution in 2015. There are options to turbo-charge your savings even more. If offered, you can sign up for “auto-escalation” which will boost your contribution every year. You can also manually increase the amount of income you contribute to your 401(k) whenever you get a raise.
Choosing the Wrong Investments
Making the incorrect investment choices can be just as detrimental as investing too little into your retirement plan.According to a study conducted by The Society for Human Resource Management, 57% of companies offer one-on-one investing advice as a part of their pension options. Even if you know what you’re doing, it may be beneficial to take the advice of a professional. You can also do research on your own, using an online asset allocation tool or an independent financial adviser.
Many investors ignore the fees associated with their retirement options. Despite of the fact that regulation require investment firms to clearly discuss the fees tacked onto their funds.
The smallest of fees can have a large impact over time. It’s important to make sure you are paying close attention to what fees your account accrues.
Withdrawing Too Soon
We cannot stress this enough: do not withdraw from your account before your are ready to retire. Typically, you can take out a withdrawal penalty-free at the age of 59. Many investors get an early jump on utilizing these funds. You should sit tight and let your investments grow, even if you can access your funds without a penalty.
Borrowing against your 401(k)
There is an option in most 401(k) plans that allows you to borrow a certain amount of money at a below-market rate. According to the Investment Company Institute, 18% of employees participating in defined contribution plans have outstanding loans against their accounts. If you borrow from your account, you will be missing out on any fund accruals you could have earned with your loan money. Additionally, if you lose your job, you will be required to immediately pay back your loans.
If your 401(k) hasn’t grown significantly by the time you decide to leave your job. You should still let it be or roll it into a Roth 401(k), otherwise you may face hefty fees and taxes. The average worker changes jobs roughly 11 times between 18 and 46 years of age. This is according to the Bureau of Labor Statistics.
Cashing out every time you change jobs will definitely add up.
Ignoring Your Alternatives
If you have the option to make Roth 401(k) contribution, you may want to take it. A Roth account allows you to pay your taxes upfront as soon as you contribute, but you can withdraw in retirement tax-free.
A Roth 401(k) account does not put limits on your contributions. If you’re a high earner, this offers you an opportunity to pay lower taxes on money you’ll be able to use later.
Investment Mistakes Aren’t the Only Things Impacting Your 401(k)
The above options can mess up your 401(k). But, you also need to be aware of a few life curve-balls that can negatively impact your retirement savings. It is important to make sure you are financially stable.
You also should be aware of how these things impact your 401(k) and try to set back your pension plan.
Divorce is not an investment pitfall; however, it can mess with your retirement savings. This is mostly because divorce causes couples to split their assets – which could include retirement funds – and increases their cost of living. Remember, single individuals may need to plan for retirement differently than married couples, and this is because their lifestyles are different. Additionally, divorce can negatively impact your credit or leave you with debts that will affect your retirement years.
Spending Too Much
Having an income and getting used to spending it a certain way during your working years may negatively impact your retirement. A lot of retirees find themselves spending the same amount of money – sometimes more – during the first few years of their retirement, without a steady income stream to replace the money they’ve spent. Changing your spending habits now can make your 401(k) last longer.
Supporting Grown Children
There are circumstances in which this is necessary; however, if your children are already grown and are still receiving financial support from you, they are effectively draining your retirement funds. The money you provide to your child or dependent can be invested in your 401(k) or saved in an emergency fund. Instill good spending and financial habits in your children at a young age to preserve your retirement fund and to ensure that they are setting themselves up for a good future.
A vacation home in The Hamptons or a second home somewhere has become a part of the American Dream – one that is a huge financial drain on your pension budget. Selling your second home and downsizing the first is an excellent way to begin to budget for your retirement.
If you can’t imagine selling your vacation home or condo, try renting it to help pay for the mortgage. That way, you can use it when you like and ensure that it isn’t negatively impacting your retirement budget.
Every financial decision you make now can impact your financial future. You should sit down with your family and a financial planner to make sure you are on the right track for your future. Give us a call today to see if how we can help!